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3 Mistakes that entrepreneurs make by investing in “Sexy” Investments.

By Jordan Wirsz

Eternal optimism is a common thread for most entrepreneurs. Naturally, most entrepreneurs are optimists; after all, if they weren’t, why would they constantly take the risks that business throws at them on a daily basis, in exchange for a greater reward? As an optimist myself, I had to learn the art of becoming a realist when it came to managing money and investing. Early on in my career as an entrepreneur, I recall investing my profits both in growth and personal investments in a rather emotional way. I, like most entrepreneurs, was hoping for “the big one.” The one big investment, the great idea, the person who had the deal of a lifetime, the sexy deal that would change my financial life forever. And I was determined to be a part of it…

In the end, I did succeed at a very early age in making millions. But I made them slow and steady, one good deal at a time. Along the way, however, I learned some important lessons through the school of hard knocks, and in the process, also lost millions.

Investing is as much about psychology as it is stock markets, real estate deals, or startups. Even the stock market moves on a day to day basis are more about perception of value and desire to take on risk than it is about daily changes in the value of a company. People get optimistic, they get pessimistic, and somewhere in between, the markets move. We all have our own motivations, goals, and tolerance for risk versus reward. However, aggressive entrepreneurs typically have an above average tolerance for risk in exchange for greater reward. Naturally, that is built into our DNA. And as such, we are also susceptible to making extremely poor decisions based on our appetite for growth and gain. That in of itself is not necessarily a bad thing, but it can lead to very bad things if not kept in check.

Entrepreneurs typically work to become wealthy, but 99% of the time, they end up working for higher incomes and for those of you who don’t know, income is not wealth. Wealth is a net worth which is not relied upon for your lifestyle. Income, on the other hand, is most often used exclusively for creating lifestyle.

Entrepreneurs typically think in multiples. For example, if a business was started with $5,000 and now you are making $100,000/year from the business, that is a multiple of 20 on your original investment!  That’s great…The problem is that now anything less seems “boring”. The idea of that same entrepreneur taking 10% of his/her income and investing in a mutual fund for a 5% return seems silly and meaningless. An aggressive business owner will think, “if I take $10,000 and invest it at 5%, I could make $500 per year. Big deal! But if I take that same $10,000 and invest it into my business, I could make another $100,000/year, and double my business. THAT is a great investment!” That line of thinking is actually not bad. If the math works and the risk versus reward meet your expectations, then for the sake of business growth, that makes all the sense in the world.

Where entrepreneurs get in trouble, however, is when they’ve saved a substantial sum of money relative to their net worth, and decide to invest it in a highly speculative, risky investment in a “win all or lose all” kind of deal. Over the years, I’ve saved relatively substantial amounts of money, and invested them in ideas or businesses with people that I trusted explicitly, and almost every time I’ve lost money. And sometimes, I’ve lost “big” money…Life changing money…Even amounts of money that most people would consider retiring off of. How did a smart, handsome, brilliant guy like myself get talked into investing into a total loser of a deal? Well, there are three common elements that are associated entrepreneurs making silly investments.

1. Entrepreneurs often like investing in things that appear to be “sexy”. We all have a different idea of what “sexy” looks like. Maybe you fantasize about investing in big high rise hotel projects. Or maybe you fantasize about investing in the next Facebook, Twitter, or Instagram. Some people look at the oil business and dream of owning part of a big oil company that drilled a hole into the center of a massive oil reserve. Whatever your idea of “sexy” is, whatever you might fantasize about investing in that you know little about, is something generally worth staying away from. Sexy investments, in sexy industries, with big names behind them are never sure things. We’ve all heard the adage, “invest in people, not products.” Well, yes, but really to be successful in any investment, you need both the people and the product. You need intelligence combined with the right timing, product, and execution.

Recently, I was asked to join the board of a technology company, and further asked to become a co-CEO to help turn the start up around. The other people on the board and the other investors in the deal were big…In fact, big enough to be in a top executive position of a multi-multibillion dollar technology company. They wanted me to invest a modest amount of a few hundred thousand dollars, and to get involved to take the company to the finish line to be acquired. To me, this was a “sexy” investment. It had big names with it, other big investors who were, arguably, smarter than I. So, I took the opportunity seriously, and vetted it out very thoroughly. But ultimately I came to an appropriate conclusion: I knew nothing about the technology, nor did I know too much about exiting through a sale of intellectual property to another company. Moreover, I wasn’t impressed with the other day-to-day leadership of the business, and I didn’t want to battle for control which would have substantially distracted me from my main business. Truly, I had little to offer except my deal making and business skills, and of course the money they wanted me to invest. I chose to gracefully decline the offer to get involved. Although the potential was to quadruple my investment in a matter of months, and it would be a great opportunity to hob-knob with big technology firms and executives, I knew that just because it was sexy, that didn’t mean it was a good investment.

Several short months later, I was proven correct. The company has all but folded. Out of money with an aging set of technology which may not even be relevant in the next generation of hardware, I probably saved myself several hundred thousand dollars and a lot of time, heartache, and anguish over lost money.

2. The second element in making a poor investment decision is the idea that complexity means legitimacy, and the fact that complexity gives a false impression of sophistication. Often times, the simplest investments with the least amount of complexity are the ones that turn out the best.

“Only invest in products and companies that you can explain to a six-year old.” ~ Unknown

Entrepreneurs are often enamored with complex ideas and solutions because we love the challenge of figuring it all out. We also buy into the idea that for something to be seriously profitable, it also must be seriously complex. That couldn’t be further from the truth.

Investing in ideas, people, or products that you don’t fully understand can spell disaster. More often than not, big ideas even with big people behind them, don’t get off the ground. Sticking to your core competency and investing in things you know and understand is key to keeping and building wealth. This is one of the reasons why I am not a fan of complex financial instruments and securities like mutual funds, annuities, or other products that take 300 page prospectuses to explain how they work.

Simpler is better. Period. If you can’t understand it, if you can’t fix something that goes wrong with it, don’t invest in it.

3. The last, and perhaps trickiest of the sexy investment pitfalls, is investing in something because someone else, perhaps richer, wealthier, or smarter than you is doing it too. Back in late 2007, I happened to be friends with a member of one of the wealthiest families in the world. The wealthy family had a big investment deal that they were doing, and they were very excited about it. So, me being the aggressive entrepreneur that I am, I tried to find a way to tag along, and I did. Less than a year later, I was looking at a personal loss of about $800,000. Combine that loss along with the perfect storm in the real estate business of 2008 and beyond, I was really taking a beating.

What went wrong?

Well, first I broke rule #1. I invested in something that was sexy, big, and interesting to me. Second, I broke rule #2 by investing because it was complex, and even though I didn’t understand the business or the value of what I was investing in, I knew that the fact that it was complex of course meant that it was going to be a home run. Last, I broke rule #3, I invested because other people, “far smarter and more successful than I,” were investing in it too. I literally broke all three of my own rules, and lost close to a million dollars because of it.

At the time that I made the investment, I didn’t really think about my investment in the proper context. Of course I was following much bigger and smarter guys in, but they also had much bigger pockets than I did, and could afford to sit and wait out the financial storm a lot longer than I could. Being a “follower investor” is a silly, novice mistake. A mistake that cost me a lot of money.

Sexy investments aren’t always the best investments. Invest in the practical, simple, easy to understand things that you can take control of if needed. Hence, why I almost exclusively stick to real estate and real estate related businesses, because not only to I understand it well, but I can touch it, feel it, and when something goes wrong, I usually know how to fix it.

As an entrepreneur, you take a massive amount of risk on a daily basis already. Business is inherently risky. You don’t need to take your hard earned profits and invest in a sexy investment that gets you excited, but that also has the ability to bankrupt you or set you back years and years from your ultimate goal of being wealthy. Don’t compare yourself to Steve Jobs, Bill Gates, Warren Buffet, or anyone else…Don’t fall into the trap of saying, “but they did it and it worked for them.” The truth is, they were entrepreneurs just like you and I, and they were one in a billion. They grew their entrepreneurship skills in an area of expertise that they knew and understood, and as a result of their core competency, they made it big. Be your own entrepreneur, and be your own investor. Be smart, and don’t fall into the trap of investing in “sexy” deals.

May 13th Weekly Recap

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(Article from Jordan Wirsz)


Savant Report Week End Summary

May 13, 2016
By Jordan Wirsz – Savant Investment Partners

First and foremost, happy Friday the 13th everyone! Savant wisdom of the day, stay away from black cats and ladders.

Real Estate Bubble – U.S. Housing and Commercial Real Estate Artificially Inflated by Low Interest Rates:

There is continued rhetoric in the markets regarding the prices of housing and commercial real estate here in the U.S. Many people are saying that we are in a “bubble” and that the market is too hot to be investing. If there is one thing that I know, I know that the “rhetoric” for media is usually an incredibly good contrarian indicator. Name the last time the media was ever right about an investing idea, and I have a steak dinner for you.

The argument went mainstream for fund managers when Starwood Capital’s Sternlicht said real estate is “bubbly” but unlikely to pop, on a taped CNBC interview: http://www.cnbc.com/2016/05/13/starwood-capitals-sternlicht-real-estate-getting-bubbly-but-unlikely-to-pop.html

Low interest rates have helped real estate, of course, but that in of itself does NOT mean that low interest rates have created a “bubble” by any means…At least not in the general market.

Real estate has roared back to the forefront of investing classes for a huge number of reasons:

  1. Real estate returns, compared to a lot of other asset classes right now, are above average;
  2. Depreciation is a gigantic tax advantage;
  3. Prices have been (and still are in many markets) relatively cheap;
  4. Capital appreciation is the icing on the cake
  5. Rent rates are rising, which means returns are likely to increase, as are values

Realize that all sub-classes of real estate are not the same, and each has its own nuances. HOWEVER, they all share the common 5 attributes listed above. That is why dozens of hedge funds and large investors have been buying homes over the last number of years. If you can slam down a 5% cash on cash net return with the tax benefits of depreciation, its really a 5% “tax free” investment. Then add on another 5% in annual appreciation, and tax adjusted you have a double digit return.

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Rental rates aren’t increasing quite as fat as appreciation is, but that is to be expected after the catawampus real estate crash that we went through, not to mention the fact that wage inflation and real inflation have not yet caught up in rent rates. Reasonable returns going forward for residential real estate is going to be the theme…NOT “getting rich” type returns like there were back in 2005-2007.

The talk of a “bubble” is mainly due to inexperienced investors and mainstream media looking at the returns of smart investors from acquiring properties during the recession. For example, Carl Icahn bought the Fountainebleau hotel, which Carl bought for $150 million during the crash, and is now looking to sell it for $650 million. So if you paid $150 million for something and 5 years later you sell it for $650 million, does that indicate a bubble? No, that indicates that Carl got a GREAT deal on a piece of distressed real estate. During the REAL bubble in 2006, the project was going to cost an estimated $3 BILLION. Now THAT is bubble pricing.

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WHERE THE BUBBLE IS:
Perhaps the only area in the real estate that I believe we are seeing a bubble, is in what we refer to as “trophy assets” in the commercial real estate realm. Trophy assets are the ultra-beautiful, unique, popular pieces of real estate that often carry “bond like” returns, especially in major primary markets like southern and northern California. “Bond like” returns meaning sub 4%. Capital is so plentiful these days, that investors are willing to sacrifice higher returns for pride of owning a mainstream well-known asset.

WHERE THE BUBBLE IS NOT:
The commercial real estate market (industrial, retail, and office) have been steadily increasing in value while rent rates have grown modestly and net space absorption has increased. Industrial being the hottest of the three, with retail in second place and office being the laggard. Commercial always follows residential real estate…Consumers drive our economy, and the first indication of a strong consumer is a strong real estate market. While housing has doubled or tripled in value from “Carl Icahn” type prices at the bottom of the market, most commercial has increased perhaps a “modest” 50%. A perfect example of this is an office building that I am working to buy for my company in the hottest, nicest, most prestigious area of Las Vegas known as “Summerlin”. The building sold in 2007 for $4.4 million, and today’s market value is roughly $2.1 million. Are we in a bubble? No, not even close. For that same building, rent rates used to be $2.25/ft on a “triple net” basis…Today, they are closer to $1.35. No bubble to be found here… Just high quality real estate finally finding its footing in the marketplace.

THE NORMALCY BIAS:
There is a psychological phenomenon known as “the normalcy bias.” The normalcy bias theory states that whatever is normal, people have a tendency to believe that it will keep going, as it always has, and will exaggerate or under/overestimate the effects of change. In real estate, the bias is remembering the crash of 2008 and beyond. People are nervous, and consequently they resist the idea of a “healthy market” being anything other than a bubble. Don’t fall into that trap. Mark my words, real estate will be THE place to make money for the next number of years. My bias is to buy commercial real estate in the Southwest or Southeast parts of the U.S., in major secondary markets such as Las Vegas, Phoenix, Orlando, Tampa, Miami, etc.

STOCKS:
I have long been an advocate of staying away from technology stocks, and as such, I have missed the absolutely FANTASTIC rally that Facebook has had since its crash after their IPO, which has returned well over 300% from the lows. Technology is an incredibly risky, fast paced environment to try to “invest” in. In fact, its downright cut throat and competitive on a scale and level that is hard for most outsiders to understand. Hence, why I’ve stayed away from it after taking several bruises in the sector almost a decade ago.

But there is one opportunity that I believe has some fundamental value, worthy of considering. We all know how big the “twitterverse” has become. If you want to watch the political musings, don’t turn on CNN or Fox News, just login to Twitter and watch the presidential candidates go at it. Or if you like to follow celebrities, watch the scandals unfold in live, 140 character tweets. There is no doubt that Twitter is as mainstream as social media can possibly get. Twitter has gotten beat up over the last year, tanking its stock price from almost $40 to where it trades today at $14. The reasoning for the drop in value is less fundamental or technical, but more oriented to leadership and monetization. Make no mistake about it, Twitter is still INCREDIBLY relevant to today’s social media driven world.

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The “talking heads” on TV and now poo-pooing the stock, some calling for another drop to $10/share. But one thing I know, is that when people get too bearish, its usually a sign of being close to a bottom. It may be worth considering a look at Twitter for a medium to long term investment, hoping for a leadership turnaround and even a modest recovery would be a very good return.

AGRICULTURE TOUGH TIMES NOW GOING MAINSTREAM:

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I’ve been touting the down cycle of agriculture for several years, but now the mainstream media is also following suit. The Wall Street Journal published an article yesterday saying that farmland values are dropping, and the Chicago Fed cited the biggest drop in farmland values since the farmland value crash of 1987. Keep a steady eye on the farmland value decline, and watch it carefully for a bottom in the years ahead for investing opportunities. In the meantime, I’m a fan of the short FPI strategy, which is a publicly traded farmland REIT who has picked up what I consider to be a lot of farmland at bubble prices.

SAVANT REPORT GOING FORWARD:
It is a bitter sweet to announce that we will be discontinuing the Savant Report at the end of this month. As many of you know, the Savant Report used to be a free publication that grew, and grew, and grew. We now have a strong international following from investors in more than a dozen countries. However, fortunately Savant Investment Partners, my commercial real estate investment and development company is also growing, and growing, and growing, to the point that the time and dedication required to create and distribute high quality content is unfeasible. We have considered many alternatives to shutting down the publication altogether, however managing the input and time lines of other authors will make it equally difficult on my staff and I to focus on our utmost priority, which is a large and active portfolio of commercial real estate.

The Savant Report has been a passion of mine for many years, and I do intend to keep it as a free publication that we will distribute as time permits, however the weekly updates and paid subscriptions will be discontinued at the end of this month. All monthly subscriptions will be canceled immediately and all annual subscriptions will be refunded on a prorated basis.

I can’t thank you all enough for the massive support and the wonderful friends I have made from our subscriber base. Please know that my staff and I will be remaining incredibly active in distributing content as time permits, free of charge, and that our commitment to cycles based investing, and particularly real estate at this point, is unwavering.

Sincerely yours,

Jordan Wirsz

May 6th Weekly Recap

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(Article from Jordan Wirsz)


Savant Report Week End Summary

May 6, 2016
By Jordan Wirsz – Savant Investment Partners

Here we are in the first week of May, 2016, and as it never seems to fail, there are headlines everywhere that confuse the daylights out of investors.

I want to start our Savant Report this week by saying that the Savant Report is meant to be a simple, one-stop read for investors to determine where things stand for the week in a variety of markets, with actionable ideas for you to consider. Keep in mind, however, that high quality actionable ideas don’t come every week….Market cycles don’t move that fast. I am expressly *not* a trader, and I discourage people from trying to “trade” the markets. I’ve seen an unbelievable amount of investors try to time the market, and they fail a minimum of 7 out of 10 times. Trading is difficult…Much more work, for a lot less money, than simply trying to time the bigger market cycles and take advantage of strategic opportunities. Therefore, I often talk about the bigger picture that paints the background on which the markets dance. This is perhaps one of the few ways to stay involved, but not necessarily invested week by week.

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This week, we have major headlines which affect the longer horizon for stocks, bonds, real estate, and commodities. First, lets start with the unemployment rate. The U.S. unemployment rate was left unchanged at 5% in April. However, that 5% figure is what is known as the “U-3 unemployment rate” which is defined as “total unemployed, as a percent of the civilian labor force,” but does NOT include a number of employment situations. A broader figure, known as “U-6” is used as a more “real” number for unemployment. U-6 unemployment is defined as “persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the labor force.” Well, the U-6 number is almost double the U-3 number, coming in at 9.7% for April.

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We’ve known for a long time that the unemployment number is not truly inclusive of underemployed or other lacking employment participants, but the U-6 number is significant because it is still several percentage points ABOVE the pre-recession level. Yet, we look at stocks, and we are ABOVE the pre-recession level in many valuations. This disconnect between jobless rate and stock valuation is never in percent harmony, but it is a clue to overvaluation and undervaluation. The trick is to understand that overvaluation can persist for sustained periods of time, and even become more overvalued for a period of time that doesn’t make sense.

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Here you can see that corporate margins are down, while wage increases are up. This is a fundamental issue that will undoubtedly have a direct impact on valuations.

Another tell-tale sign that wage inflation (what little it is) may drag down valuations is the plateaued productivity curve.

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This is a chart of the unemployment cycle versus the stock market cycle, which shows the ebb and flow of both. Based on this chart showing the correlation, it is not entirely out of the realm of reason to expect a pullback in stocks or a rise in unemployment rate. This would be somewhat common for election and post election years.

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Now its time to get political.

POLITICS:
Remember back to 2008 when it was an election year… the markets were hanging on by the skin of their teeth. We had seen quite a substantial run up in equities during the boom, real estate soared, and unemployment was low. 2008 was a year on the fringe, and that election year the world fell apart, starting with the U.S. I hear from stock traders about all kinds of statistics that say election years are good, bad, and everything in between based on statistics that they pull from election years past. But here is what I can tell you, is that this election is nothing like what we’ve ever experienced before. Take what we’ve known from the past, and throw it out the window. We are in a uniquely different economic and political environment, and investors and traders alike are grasping at straws to try and figure out which way the markets are going.

When you look at successful investors like Warren Buffet who always seems to be more patient than most other investors, the core principle of success seems to be the idea of relative value with a long term view. When you look at stocks today, and specifically the chart above, it’s difficult to say that stocks are cheap like they were several years ago. In fact, we’ve doubled or more since the lows of the recession. My point is not that stocks are expensive, but that they are not as cheap as they once were, and secondarily, that values are difficult to truly determine in today’s environment.

My good trading buddy Jim Willis thinks that we could see a sideways pattern in stocks here for several months to come, and he believes ultimately ending the year on a high note. I believe that the stock market certainly has the potential to go much higher from here, however, at current levels without a technical correction which we haven’t seen, there is likely more risk to the downside than probability to the upside. Remember, “The trend is your friend until the end.” The trend has certainly been to the upside over recent years.

During an election year, there are going to be a lot of calculated decisions from the big money, and much of which may not want to place a bet one way or the other until after the election. In this case, given the volatility and deep divisiveness in the country, they may not want to make a decision until well AFTER the election to see how things play out. A close family friend is graduating from the Arizona State University in engineering. He has been interning at a massive public company which shall remain nameless, but is intimately involved in defense contracts and is reliant on government spending. The bottom line is that the company will not offer even the most talented intern a full time job opportunity until AFTER the election, to try and determine whether they will have future contracts and revenue to support it. The point is, even the biggest companies are unsure of what is to come this year from the intense political battle that is ensuing right now. That means jobs are likely to remain flat, the market may remain flat, and everything may get the “pause” button pushed until we know who the next president will be.

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Like it or hate it, this presidential election will shape America unlike ever before. There is an unmeasurable amount at stake. They say, “what doesn’t kill us will make us stronger,” but this election cycle has the potential to literally turn both the democratic and republican parties upside-down, and with it, has the potential to make or break our economy. Do I really want to be invested in equities/stocks with a bet one way or the other? Honestly, no I don’t. I believe that is a bet that is safer to take after we determine what the effects of the election are going to be. As a trader, the impulsiveness will make you want to be early to the bet…But the wisdom of a real investor will happily sit on the sidelines and see where things trend before making a firm decision. Now again, all of this is predicated on the idea that you have zero invested in stocks, and are making the decision whether or not to get in…Likely many of you already have exposure to stocks, and thus the decision becomes more about how much exposure you want versus whether to be in at all or not.

I tend to believe that Donald Trump will likely win the election in November. If you think that his election as POTUS won’t affect the markets, you’re crazy. There will be havoc in currencies, trade deals, commodities, and markets with the unknowns of the changes coming. I’m not saying it wouldn’t be good, but I’m saying the big money movers are likely to step aside to re-think their long term strategy and plan a likely path forward. Companies like Lockheed Martin, GE, Honeywell, Boeing, BAE, etc. will be held to a new standard of efficiency, as Donald Trump has always prided himself on. Having new contracts with big penalties for being over budget and behind schedule could literally rock those stocks to the core. A more fiscally responsible government isn’t necessarily positive for all stocks and equities.

REAL ESTATE and INTEREST RATES:
The real winner from a Donald Trump POTUS is going to be real estate. The real estate magnet himself will want to see the value appreciation of his own assets, and it is also the one asset class that Trump understands the best. Interest rates tie into both real estate and economic strength, therefore under Trump’s presidency, it is likely that he will want to keep interest rates relatively low. Trump has already cleared the way to replace Janet Yellen as Fed Chair (great news!), and will no doubt keep his finger on the pulse of interest rate impact on the financial markets and the broader economy.

Right now, interest rates remain low. Bond yields are incredibly low. The 10 year yield today was at a whopping 1.75%. The Fed funds rate at .37, compared to .13 from a year ago. Literally 25 bps of change in all rates in the last several years. I don’t think that trend is likely to change, now or into the near future.

So, the actionable considerations for this week are:

  1. Although unemployment is at 5%, real unemployment is closer to 10%. The economy may be looking rosier than it really is in terms of the equity markets.
  2. Wage inflation, albeit small, is out-pacing real earnings growth. That is a major hurdle for any common sense approach to investing in stocks.
  3. The unemployment rate and stock market are correlated, very clearly. Time for both to change directions?
  4. The possibility of recession in the next two years remains within the realm of possibility. The real employment numbers, stock valuations, slow earnings growth, and low yields are indicators that we should be paying attention to.
  5. Election year stats are difficult to invest with, and on top of it, this year’s election is as unpredictable as they get. Trump is the likely election winner…I will put money on it. And if that happens, that isn’t necessarily positive for a lot of major corporations. Fiscal responsibility and higher expectations from government contractors is going to be the theme. I’d be looking at what corporations are top heavy in government contracting and consider a long term short position if Trump is elected. Although military spending would increase, standards will be much higher and tighter than many of those contractors have ever seen before.

SAVANT REPORTS FUTURE:
For the past number of years, I have published the Savant Report with great pride and passion for the project. As you have probably already surmised, it is not a “money making” endeavor for me. The Savant Report is a project of responsibility to those who want to pay attention to investing wisdom. However, the growing time commitment that it requires, as well as the growth in my real estate investment firm are both out-pacing my ability to continue to devote the time and effort on a weekly basis to this passionate publication. Although no decisions have been made, I have held several meetings internally within my organization to try and determine how we can continue serving our global subscriber base effectively. Once decisions are made about the publication’s delivery frequency, contributing authors, and content layout going forward, we will inform all subscribers and make adjustments as necessary.

April 29th Weekly Recap

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(Articles from Jordan Wirsz and Nell Sloane)


Savant Report Week End Summary

April 29, 2016
By Jordan Wirsz – Savant Investment Partners

Amid a slumping economy and reduced levels of consumer spending, the Fed on Wednesday again opted not to raise interest rates. “Economic activity appears to have slowed,” the Federal Open Market Committee said in a statement released after its two-day meeting this week. “Growth in household spending has moderated, although households’ real income has risen at a solid rate and consumer sentiment remains high.”

The bottom line is that we saw 0.5% growth in the first quarter of 2016, lower than the expected 0.7% growth. Personal consumption rose 1.9% and personal savings rate grew by 5.2% versus the 5% 4th quarter of 2015. Our economy is growing at the slowest pace in 2 years. The Atlanta Fed’s forecast has proven to be right on…

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The velocity of broad money touched a new record low. All the new money created in the economy (mostly by banks lending) isn’t translating into growth. Although Obama is touting his greatest achievement as bringing the economy out of recession, it doesn’t appear he did a very good job at it. The velocity of money is one of the biggest factors in true economic growth. This is worrisome, and previously I had believed we bottomed in the velocity of money, and I was looking forward to growth. This news is disappointing to say the least. This undoubtedly means that things are not as rosy as the government would have us believe, perfectly tying into the .5% GDP growth in Q1.

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What this all means is that despite people feeling “good” about the economy, real substance is lacking. Carl Icahn sold his prized possession, AAPL (Apple) just in time to have the stock take a 10% dive on the news plus news of slowing iPhone sales. Carl said that he expects the markets will have a “day of reckoning” and that he has a “huge short position” in addition to long positions.

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Adding to Carl Icahn’s view, U.S. corporate defaults are rising, and in fact the highest since the financial crisis. With major retailers having challenges (Apple, Sport Chalet, Sports Authority, etc.), there are reasons to be concerned about the market in the context of rising corporate debt defaults and the cross contamination that might come from it:

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The markets are at a critical juncture now. Candidly, I’m surprised by the rally that we’ve had, but I don’t feel comfortable with the market’s volatility, which tells me that this rally is not as strong as some would like to believe. Here is a 60-minute bar chart of the S&P emini futures… Big ups, and big downs.

My analysis of the market remains biased towards volatility and downside at this point, not additional upside, but stranger things have happened.

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REAL ESTATE SLOWING:
Last week we talked about the big box retail risk in the real estate market, and the week before about the Miami Meltdown. But this week, the housing data continues to point towards slowing. The pace of U.S. homebuilding fell in March to its lowest level since October. Housing starts fell 8.8% from a month earlier, to an annual rate of 1.089 million. We are basically flat year over year, pointing to the slowdown I have been predicting for the last 6 months or so. Single family home starts fell 9.2% in March, which makes up about two-thirds of the housing market.

Homebuilders have done exceptionally well in the economic recovery. A big part of that, however, was how cheap they were able to buy land from 2009-2012. Now the good land deals are gone, and they are starting to pay much higher prices for development land amid slowing sales paces. Home ownership has continued to fall in recent years, not grow:

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A big part of this trend is certainly millennials. It was once a coveted accomplishment to own your own home…Today people are more worried about the stylish car they drive and name brand clothing. I believe this trend is short lived pending a Republican presidential win, which will help establish a new trend of less subsidies and more reliance of self-created financial futures.

The next chart shows U.S. housing inventory adjusted for the population. This is why home prices are rising faster than salaries:

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Rental vacancies are still relatively tight, and tightening even more…Which is very interesting considering the massive multi-family apartment building spree that much of the country is in the midst of right now. Are we over building apartments? Not according to demand and vacancy rates, which seem to have stabilized at a reasonable mean-line. However, if the building continues and the trend shifts back to home ownership versus renting, then we could of course find ourselves in the opposite set of circumstances when considering multi-family as an asset class.

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Keep in mind that hedge funds bought hundreds of billions of dollars of single family homes during the downturn. Many of those properties have not made it to the market yet. There is a real possibility that one of two scenarios are or will be in play for the rest of this year and next year in residential real estate:

Hedge funds might start selling and flood the market, pressing prices down; or
Hedge funds might be keeping inventory off the market and holding them as rentals, keeping the home ownership rates low.

The silver lining of the housing data is that first time home buying is up, but really only because of the massive incentives that state and federal government are giving out to homebuyers. For example, here in Nevada, the state has a fund which is GIVING AWAY as much as 3-5% of the purchase price of a home in “down payment assistance.” This is literally FREE MONEY for homebuyers. Since home buying incentives began, first time home buying is up…My only problem with that is that it is somewhat fake…Its like the Fed buying bonds…Its artificially created or stimulated demand, which isn’t sustainable for the long haul.

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Real estate brokers and agents (not always the brightest bunch when it comes to investing) are starting to talk of a rent growth “bubble” and pricing bubble. They are wrong on both accounts. While I’m not particularly bullish on housing for the next couple of years, I’m also not incredibly bearish. I think we’ll see some ups and downs, but long term I am still a believer in both residential and commercial real estate as a fantastic appreciating asset class…Until the next cycle top.

– Jordan Wirsz


Last Week Recap

April 29, 2016
By Nell Sloane – Capital Trading Group

Last week saw both the SP500 and the Dow futures try to break and hold their respective 2100 and 18k resistance areas. Both ended the week below these targets 2085 and 17916 respectively. We view 2069 as a key level for the bulls to watch as the trade in equities has been virtually straight up off the February lows.

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The bulk of Thursday and Fridays equity futures trades was basically locked in a 11 point range. With FOMC next week on the 27th, we will continue to expect a range bound trade. Both equity and bonds saw better selling late in the week, bonds more so. Which can be noted by the US 10yr Yield chart which is getting close to its resistance at 1.93%:

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Both Google and Microsoft were hit late Thursday and into Friday as their earnings disappointed. It seems as if some players took this as a cue to sell some holdings as both saw decent downside down 5% and 7% respectively:

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In what continues to be a reoccurring theme almost weekly, Kuroda was once again on the wires jawboning the USD/YEN, which was dollar bid and Yen soft. Perhaps he should realize that the investing leveraged community already knows what he says can’t be trusted, in fact his reputation has become one of Goldman, do the opposite of what they are trying to do, because in reality, they are there to take what you sell and sell to you what you shouldn’t want to own.

Anyhow, it seems as if the BOJ is trying to defend the 107 level or 93-00 level in the futures as shown here in this chart:

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We also had the non event ECB meeting this week. However we don’t think it’s such a nonevent as starting this June, corporate bonds will be the target du jour of the new central bank purchase program. This should solidify to any corporate treasurer to ramp up said C-Suite option packages, because the ECB will be there to buy your debt so you can fund buy backs, hint hint Deutsche Bank…

Here are the details of the program, which rest assure will add further bullish sentiment to the DAX as well as its worldly counterparts, specifically the algo FED Citadel driven SP500:

ECB announces details of the corporate sector purchase program (CSPP)

The CSPP aims to further strengthen the pass-through of the Euro system’s asset purchases to the financing conditions of the real economy.
Purchases will start in June 2016.
The CSPP will be carried out by six national central banks acting on behalf of the Euro system, coordinated by the ECB.
In combination with other non-standard measures, the program will provide further monetary policy accommodation and help inflation rates return to levels below, but close to, 2% in the medium term.

China was out this week announcing a new The yuan-denominated gold fix contract which will be launched on the Shanghai Gold Exchange. Perhaps the largest buyer of metals is sick and tired of all the paper selling manipulation state side, or they just realized that the true market dynamics are not being full represented. We dare not say manipulated, rigged, naked short selling or any of the like, right?

Other interesting tidbits this week, saw none other than Pimco’s strategist Harley Bassman in his viewpoint entitled “Rumpelstiltskin at the Fed” discuss another option for the Fed, particularly this, “the Fed should unleash a massive Fed gold purchase program that could echo a Depression-era effort that effectively boosted the U.S. economy.”

Bassman says that the Fed should “emulate a past success by making a public offer to purchase a significantly large quantity of gold bullion at a substantially greater price than today’s free-market level, perhaps $5,000 an ounce?

Now how is that insight from one of the largest bond groups in the world? Perhaps higher ups are trying to convey a simple message to the FED, aka How long can we keep this fiat money charade going. Bond yields in negative territory are certainly not normal and should never exist in a sane world! That is our opinion.

Finally after much hoopla, the Federal Reserve is planning on eliminating Andrew Jackson from the $20 bill. Many were surprised by this, however we were certainly not. In fact we are quite surprised that it took them this long to get rid of him. Jackson was one of the strongest opponents of central banking. One notable speech included these words, “You are a den of vipers and thieves. I intend to rout you out, and by the eternal God, I will rout you out.” (Andrew Jackson, to a delegation of bankers discussing the re-charter of the Second Bank of the United States, 1832)-However there is still speculation and reference to the exact wording of this quote that “Old Hickory” specifically stated a specific religious order, but will let you do your own research on that.

Anyhow, we are not too surprised to see him go, but his replacement is a true beacon of freedom, an abolitionist, a humanitarian, Harriet Tubman.

– Nell Sloane

April 22nd Weekly Recap

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(Article from Jordan Wirsz)


Savant Report Week End Summary

April 22, 2016
By Jordan Wirsz – Savant Investment Partners

Over the last several years, I have continued to warn real estate investors to stay away from mid or big box retail investments. I also cautioned equity investors to be careful of companies with large amounts of mid or big box spaces. The evolution of technology in the retail industry is just beginning. Years ago, Amazon entered the market and virtually destroyed the big box retail business model. Best Buy, for example, has largely become a showroom for consumers looking for electronics and appliances. After viewing and testing out the equipment in a local store, the consumers then hop onto Amazon or any number of other online retailers and buy the item for a discount. This trend has permeated every facet of consumer buying, including clothes, shoes, electronics, tools, and even specialty goods.

I am overwhelmed with emails from commercial real estate brokers around the country trying to sell me Guitar Center leased buildings. Guitar Center has been one of the most publicly forecasted and publicized “on the verge of bankruptcy” stories over the last couple of years, teetering on the line of going out of business. Best Buy has tried to “reinvent” themselves to find a way to capture the sale while consumers are in the store, and also by trying to capture online market share.

A slew of other big box retailers has long embattled the fight to stay alive. Sears Holdings just announced that it will close 68 of its Kmart stores across the country in addition to 10 Sears stores in an attempt to stay solvent and regain profitability. One positive note for those of us in Las Vegas, is that none of the planned closures are in Nevada, as our economy keeps on growing post-recession.

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JC Penny has been the “turn around” story that never happened. They keep trying, but the business continues to struggle.

Walmart, perhaps the greatest consumer goods and food retailer ever created, is closing 269 stores worldwide in 2016. Most people, including myself, believed that Walmart was just too big to pair anything back, including its locations. Having dealt with Walmart in the past on real estate deals, they are generally very smart and specific about where they build and open stores.

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The latest casualty of the big box retail model demise is Sport Chalet, which is closing ALL of its stores after filing bankruptcy this week.

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The fundamental model of big box retail has evolved from the once traffic heavy destinations into an online marketing competition, both in pricing and ease of purchasing (such as Amazon’s one-click checkout strategy). So what is to come of all the massive big box spaces in shopping centers? I believe that as time goes on, those space will be demised into smaller spaces (costing the landlords/owners hundreds of thousands, even millions of dollars to do). The smaller spaces may get filled with non-traditional uses such as charter schools, trade schools, ethnic specific grocery stores, gyms, paint-ball enthusiast spaces, etc.…All of which are “low rent payers.” Bringing alternative uses to a shopping center is usually the “kiss of death” for a once busy, well-anchored property. Retail shopping center investors will lose millions of dollars, and will begin feeding vacant centers with lots of capital trying to keep it looking good. Once the big boxes go dark, the surrounding retail will suffer horribly. Most big box anchors bring about lots of smaller “in-line” type tenants such as restaurants, nail salons, and others…But for the privilege of being near the busy anchors, they pay top dollar rents. The financial strain on the little guys will turn many centers into ghost towns.

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Even shopping malls are having challenges competing with online sales. In the end, consumers are choosing to shop from their home or office computer rather than brave the traffic, parking and crowds often associated with going to malls. “Experiential retail therapy” is perhaps the one continual driver for shopping malls…Attracting consumers who enjoy the shopping experience on the weekends, perusing stores and making an afternoon out of the event.

The one area that I continue to be very bullish on, is what we call “neighborhood retail” which are smaller, in-line retail centers with maybe a fast food restaurant and coffee shop on pads in front of the center. The reason I am still bullish on these types of centers is because regardless of online shopping habits, consumers still need a place to go to have coffee, dine out, get their nails done, see a dentist, etc. Even better, these neighborhood retail centers don’t rely on Best Buy, Guitar Center, or Walmart to bring traffic. They rely on other immediate service need tenants to help bring traffic…Starbucks for example.

The bottom line?
1. Avoid buying or investing in “big box” or “mid box” retail shopping centers.
2. Avoid investing in companies (equities/stocks) that rely on big box space to drive big portions of their revenue.

One measure of commercial real estate market health is the spread between 10 year treasuries and the actual CAP rates that these properties are selling for. The smaller the spread, the higher the price from a historical perspective. The bigger the spread, the more opportunity there is. The chart below depicts the bottom of the market CAP rate to treasuries spread at 559 basis points (5.59%) which is massive. Today, as the real estate recovery strengthens, we have taken off about 150 bps in spread.

The definition of a CAP rate is the net income after all expenses on a property, divided into the property value or purchase price as it may be. As you can see from the chart below, cap rates have been compressing…which can be depressing, except for those of us that own commercial real estate, it means that we are in an appreciating asset class. Additionally, we get the great benefits on top of the CAP rate returns, including leveraged returns, capital appreciation, and tax benefits.

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But not all the recent news in real estate is rosy, even apart from big box retail’s challenges. The housing market is also showing signs of softening. Last week I wrote about the Miami meltdown (or correction). This week, we got the March housing start numbers which fell 8.8% from February to an annualized rate of 1.089 million. Single family homes fell -9.2% and multi-family fell -8.5%. This is the perfect “softening” that I have been forecasting in 2016/2017 that will be a great opportunity maker.

When you compare the housing numbers to pre-crash levels, we still see that year over year housing starts are up, and yet still way below the pre-recession highs. The housing market is “healthy” right now, and the ebb and flow of housing numbers is expected to be up and down in a normal market mid-way through the cycle.

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I remain bullish on real estate in general, with the exception of big box retail and mid box retail spaces. Multi-family I remain conflicted with the incredibly low CAP rates and the extremely hot state of that sector of the market.

April 15th Weekly Recap

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(Articles from Jordan Wirsz, Nell Sloane and Jim Willis)


Savant Report Week End Summary

By Jordan Wirsz – Savant Investment Partners

CANADA:
This week, I dug into researching Canada’s economic stats, which confirmed my thoughts on the overall Canadian economy’s fragile state. There is a very large debt bubble in Canada that has world governments concerned. The truth is, per capita, Canada is one of the top 7 largest “in debt” countries in the world. Canada’s debt isn’t based on public (government) sector debt, but it is the private sector (consumer) debt that has economists worried. Government sector debt can be overcome with a wide array of tools that governments can manipulate. Consumer based debt, however, is a whole different story.

A study was published by Steve Keen, a professor of economics at Britain’s Kingston University. Keen believes that the U.S. “bust” was fueled by consumer speculation rather than true investments. Additionally, a Forbes article published not too long ago details the theory that Canada is one of seven countries that is likely to see an economic crisis in the next one to three years. The others include China (which I’ve been talking about for a while now), Australia (again which I’ve talked about for a while now), Sweden, Hong Kong, South Korea and Norway. The theory is that any country with a private debt to GDP ratio of 150% and that has a five-year growth rate of 18 percent or greater in that ratio experiences a financial crisis (at some point). These milestones were met and exceeded in recent years as Canada’s consumers went on a borrowing spree. Canadians collectively owe more than 208% of GDP. From 2011-2016, private debt in Canada rose from 182% of GDP to 208%. Wow.

This has been going on for a while…Look at this chart from back in 2015 showing how far above the U.S. debt to income ratio that Canada has…And it’s grown even more since 2015. NOTE: This is household debt to GDP, a different measure of total private sector debt***

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In 2016, Canada unquestionably qualifies for a private sector (consumer) debt crisis, the likes of which may exceed anyone’s expectations. With Canadian private debt growing at more than 5% annually and GDP at a recessionary rate, it is nearly impossible for Canada to be immune to the consumer debt issue. Rolling over existing debt and paying interest on the interest will become harder to do. Next, financing growth and expansion in consumption, business investment, automobiles, real estate, etc. become more difficult.

In 2015, Canada officially entered recession.

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I’ve had the opportunity to get to know the Canadian people and markets a little bit over the last 4 or 5 years more than I had in the past. During trips to Canada, it became really clear that many folks drove brand new cars, were buying bigger homes, had a garage full of recreational vehicles and other toys, and that the overall tone was “euphoric”. Young bucks who were in the oil or agriculture world found themselves in a great bull market, and they made sure to leverage as high as they could in many instances.

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Speaking of real estate, look at this one:

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The collapse of natural resource prices and activity has made the unsustainable situation even worse. One recent example from this week is Peabody Energy which filed for chapter 11 bankruptcy this week…The largest coal mining company in the world. The large base of agriculture in Canada is also hurting, with grain prices hitting extreme lows after only a few years ago topping all-time highs. Boom…And bust. Some people might say that Canada has other industry aside from commodities and natural resources (particularly energy). While they are correct, that percentage of the Canadian economy has been shrinking for over a decade…

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So where does it end for Canada? I’m not sure. But I think it starts here. How long will it take to unravel the consumer debt issue? I can’t answer that either. It takes time…How much is a guessing game.

The economic issues for Canada have been looming for the last several years. One way to clearly see when they started to show the cracks in the armor is to look at the Canadian Dollar against the U.S. Dollar. Clearly, since at least 2014, the market has been pricing in some concern, and that selloff has continued and deepened.

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Although the Canadian Dollar is substantially off it’s lows below $.70 (now trading near $.78), I don’t think the currency’s problems are over. Much like the U.S. Dollar, the economy will need to see a bottom before making its run higher. At this point, I think it is far too soon to call a bottom in either the Canadian economy, or the Canadian Dollar currency.

If you have assets in Canada, be vigilant, and perhaps consider using this bounce in the currency to trade into U.S. assets. If you don’t have Canadian assets, keep some cash ready on the sidelines to buy in once the economy has hit bottom…A point in time not yet determined.

The Canadian investment opportunity remains one of my top 3 investment ideas at this point in time. Wait for a probable bottom in the Canadian economy, currency, and real estate…Then it will be time to buy Canadian equities and real estate at discounted values with a low currency…And wait for it to swap ends. This will, no doubt, be an opportunity for massive gains for those who are patient enough to wait for the right entry point (which may be years away) and wait for the next bull cycle in Canada. Warren Buffet is a patient investor…And he’s done quite well picking opportunities during depressed times. I like that strategy.

– Jordan Wirsz


Weekly Update

By Nell Sloane – Capital Trading Group

In a leveraged fiat world, all that matters is access to liquidity in times of stress. The carnage in the price of oil not only hurts the sovereign oil producers but it also hits the little leveraged guys very hard. See the true inflation of money, doesn’t come from the central banks, it comes from banks making loans and keeping a fraction on deposit against that loan. So without loan growth, there most likely cannot be inflation. This is something that the FED rarely talks about, yet it’s quite obvious the correlation between reserve balances and the velocity of money or lack of inflation. Some will simply call it too much debt and not enough capacity to take on more. Yes we would tend to agree with that notion as well, but that is why economics is a science, there are at any one point in time a multitude of affecting factors and inputs that drive a given outcome. However let’s not lose our focus. Instead of focusing upon the little levered oil players, let’s focus upon who actually holds their loans. We would think it’s quite prudent to do so don’t you. So here is a chart from Barclays:

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These banks will have to set aside some loan loss reserves, which will affect their tier 1 capital ratios.1 Most likely these banks will down play these losses and not put forth adequate amounts to loan loss reserves in hopes for an oil rebound. It seems to be in the banks best interest to underestimate these loan losses and rather opt to allocate income to “retained Earnings,” instead which are counted fully as Tier 1 capital.

Why is all this important to an average investor?

Because it points out what the true motive and intent is when it comes to Federal Reserve and central bank policy targeting. In plain words, there are many factors to keeping the economy afloat and sometimes the dynamics of such factors change with the times. There was a time where lower oil was an expected boon for consumers and discretionary spending. However given the amount of credit and leverage inherent in the system, lower oil, real lower prices (Sub $40) is actually very negative economically for the US and the world abroad for that matter. So we think that it’s very important to watch the price of oil, it is also no wonder to us that the equity market have been tightly correlated and driven higher by this oil bounce: (Russia / Saudi Headline was, “Hope that an oil freeze agreement can be reached.”

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*Chart courtesy of zerohedge.com

It seems to be a matter of necessity as opposed to correlation. How long can the oil tanker stay afloat? That is a question of fundamentals and central bank and fiscal policy. Can governments agree on reduced production? Is the global slowdown as deep as some say? Is a recession on the horizon globally, not just stateside? These are all important questions and time will only tell. As for now the SP500 above 2040, Oil above $40 is offering a brief respite, but many are still aware that danger lurks just below these nominal levels. We think that the Federal Reserve and the rest of the global central banks are keenly aware of these levels as well.

While we are on the subject of debt, let’s look at a few charts that reflect the gravity of the situation brewing amongst US corporate’s shall we:

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These charts depict a very troubling scenario going forward. A very simple question to ask any investor in US equities is how will future cash flows be affected by this much debt growth and at what point does it start to deteriorate the underlying equity asset?

The central banks can mask the lack of earnings with increased debt subsidies, but what it cannot mask is the massive growth that US Corps are taking on just to keep their multiples up. Swapping debt for treasury stock (buybacks) is hardly a recipe for future sustainable cash flow growth.

This is clearly unsustainable and it is why the global central banks are continuing to ramp up QE and NIRP, they are in an all out war against the rising tide of the debt piper. For any novice that thinks interest rates can move higher, this should all but put that argument to rest.

It troubling to think of how devastating these QE and NIRP policies are for the true market dynamic of pricing risk. The skew is so high toward central bank incompetence that markets, for all intents and purposes have stopped functioning as markets. They are nothing more than a mirage in a desert of debt. There to entice you from the distance, at the margin if you will, to only disappoint you as time goes on. Perhaps this is why so many funds have trouble beating a basic index fund, not only do most lack any foresight whatsoever, they also cling on to market dynamics of old and fail to realize the market of old is dead and buried. The real market is quite clearly driven by global central bank funding. Driven by massive amounts of future earnings pulled forward, turbo charged with front loaded negative interest rate schemes that have little to do with quantifying risk.
Risk, as a measured by the rate an entity is entitled to pay on its debt, died long ago. This new paradigm is being shape shifted and twisted by constant central bank intervention that many managers find, simply too hard to grasp.

The current investment conundrum can be best described via the character Morpheus from the movie “The Matrix”:

Morpheus: “What you know you can’t explain, but you feel it. You’ve felt it your entire life, that there’s something wrong with the world. You don’t know what it is, but it’s there, like a splinter in your mind, driving you mad.” (the Matrix 1999)

I am sure this is how many a nary manager feel today. They cling to a system they believe is real, honest, true and pure and their actions reflect their belief in this system. They have yet to wake up to the reality, the truth that despite all they were taught, all that they know, there is only one true driving force in the market, Central Banks. To invest in traditional manners is a bet against the manipulation of economic laws these central banks continue to partake in.

Most managers will look at the fundamentals and remain very, very cautious, but with a troubling devil on their shoulder, trying to force them to commit, to toss a few chips in. This is why most can’t beat the index fund, they are using their instincts that warn them, something is wrong, something doesn’t “feel” right, well in a binary algorithmic driven investment world, your feelings have no place at the table. Shelve them, leave them at the casino’s door, or at least that is what they want you to believe. DON’T FALL FOR IT.

Time will test things in due course and nature always find away, the laws of mathematics and physics are absolute and nothing up to this point no matter how giga-fast the computer chip is or nanosecond the connection is, is going to change that. Keep your wits about you and trust that behind the scenes lurks an impending disaster that must always be guarded against, your profits and your future may very well depend on that very hedge.

This letters intent is not to scare you, but inform you, to “Free Your Mind” from the shackles of central bank largesse. Its smoke and mirrors, invest with confidence in things that make sense, fundamentally, technically and place a stake in protecting the future. If it’s one thing that QE and NIRP warn us all of, it’s the fact that all isn’t right in the global economic landscape and eventually the music does indeed stop, usually without warning.

Another interesting tidbit out this week was the “alleged” $5 billion dollar settlement Goldman was bestowed with by the US government.

In The New York Times, Nathaniel Popper took a careful look at the consumer relief provisions and found that Goldman Sachs could pay up to $1 billion less than advertised, because the company gets extra credit for spending in certain hard-hit communities or for meeting its obligations within the first six months.2

It is really a whole lot less than what Mr. Popper is leading on to, as noted by David Dayen’s piece entitled, “Why the Goldman Sachs Settlement Is a $5 Billion Sham”.

“The penalty might sound pretty stiff. But get a load of the real math.” -Dayen

Mr. Dayen even noted that Bernie Sanders recently commented about these ridiculous penalties, as he shouted “If you are a kid caught with marijuana in Michigan, you get a police record. If you are an executive on Wall Street that destroys the American economy, you pay a $5 billion fine, no police record.”

In his article he noted that $2.385 billion of the total penalty comes in the form of a cash civil penalty. He goes on to say that, “the rest is tax deductible, as a business expense. Considering the indeterminate dollar value of the consumer relief, it’s hard to say how much money Goldman will be able to write off. But going with the Justice Department’s numbers, you have $2.615 billion in tax-deductible penalty, which at a 35 percent corporate tax rate equals a write-off of $915 million. That means nearly $1 billion of the settlement is effectively financed by taxpayers.”3

So when the penalty continues to not even closely fit the crime, well you can guess what type of actions will continue. It only been a mere 8 years since 2008, yet the impending financial fraud and disaster that was once such a threat, is treated as if it’s merely just an afterthought. The type of who cares attitude and blatant lack of any regulatory or federal penalty set down on anyone of the characters that were at the forefront of this disaster is what’s truly tragic. Then again, we wouldn’t expect anything different now would we?

2 http://www.nytimes.com/2016/04/12/business/dealbook/goldman-sachs-to-pay-5-1-billion-in-mortgage-settlement.html?_r=0
3 https://newrepublic.com/article/132628/goldman-sachs-settlement-5-billion-sham


Weekly Update

By Jim Willis – Beacon Bay Asset Management

OBSERVATIONS

1Q-2016 SPX500 Action:
January was the WORST first month of the year in the history of the markets. Followed by a total recovery from mid-February to the end of the quarter.

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1st Quarter – 2016 Forecasted Metrics:
The forecasted growth metrics for both top line revenue and earnings are again in the red. The forecasted top line revenue is slightly negative at -0.8% Y/Y and earnings is -8.4% Y/Y. Takeaway: this could be the fourth quarter in a row reporting negative earnings. This is partly the reason why the Federal Reserve did NOT raise interest rates again.

2nd Quarter – 2016 Forecasted Expectations:
Currently, the analysts indicate another negative earnings total of -2.2% along with year another negative forecast on top line growth of -0.6%. Earnings season is just getting into swing this week. Next week will set the tone for the next few weeks. If the anaylsts are correct (even 50% so), it’s unlikely the FED will raise rates in June. As always, the analysts are forecasting a large uptick in both earnings and top line revenue for 2H-2016.

US ECONOMY

GDP Update:
Q215 was reported to be a great quarter at 3.9% growth. Q315 came in at a low 1.5%. Less than half of the prior quarter. Q415 final GDP numbers came in at 1.4% annualized. Import numbers were the lowest in a year. The higher USDollar is being felt globally. 1Q16 will be reported on April 28th. The early forecasts are around .1% with a margin of error of 1.3%. So, it could come in negative. At any rate, this low a figure will absolutely postpone any FED rate increases until June at the earliest.

Federal Reserve Update:
After raising rates in December with 25 basis points or 1/4th of one percent, the FED stood still in March. It does not appear that the FED will raise possibly again until June, and that is in question due to global conditions. The global markets are not doing that well and that impacts what our FED may do.

International Trade:
After 13 months of declining trade we saw a pickup last month albeit worse than last year. Overall the US is still negative for 14 months going. The high value of the USD is greatly impacting our trade metrics.

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Emerging Markets:
The chart at below is an index of most of the emerging market exchanges around the world. Last quarter we wrote it would reach $28.xx and it found support there and rebounded to a multi year support level. This steep decline since last year had spooked the FED and major markets. This rebound is welcomed. This index is an excellent barometer of world emerging economies.

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ENERGY: The Saga Continues…Until it Stops.

Crude Oil:
OPEC met in January and proposed to FREEZE production at January levels if EVERYONE would agree. They all did not. Notably IRAN did not. So, the result was a quasi-freeze that most OPEC members agreed to (they couldn’t pump any more than they were currently pumping)…. so the saga continues. Iran and Saudi Arabia are still at odds. But, Iran is not exporting all the excess surpluses they were purportedly holding awaiting sanctions from the USA to be lifted. To date they have merely shipped 8-9 cargoes, mostly to Europe. The insurance entities cannot get the ships insured against environmental mishaps, and settlements in USD are at risk with banks having problems honoring letters of credit due to fear they are breaking existing sanctions with the USA. There is another meeting scheduled in Doha, Qatar on 17 April, but all observers suspect little will occur as Iran is not in line to agree to any freezes while Russia is rumored to agree to a ‘CAP’ on exports. There is a difference between production and exports. Most countries export a lot LESS than they produce due to local consumption.

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Bottom line: The USA rig count is down month over month to 348. Canada dropped from 206 to only 69. Global supply and demand is beginning to balance. USA Shale production has fallen another 250K/BPDay during 1Q16. Since last April, our onshore production is off 1 million BPD and we are now importing about 800K/BPD more than a year ago. The difference is from off shore production. So, the USA is importing (buying on global markets) a lot of new oil. In the Middle East about 500K/BPD went off line in 1Q16 spiking up the global prices from mid $20s to over $40 inside of two weeks (along with traders covering their short positions). This just indicates how volatile crude is with just minor changes. Changes are coming. Before June we should see a move in crude into the mid $40s. Demand is coming on strong in the northern hemisphere due to summer gasoline demand. A mild winter can hamper that some but not much. The Mideast chaos remains at high levels while Iran and Saudi Arabia are still not talking with one another. Iran also has significant issues with allowing non-Iranian companies (oil corporations) own property or have rights inside their country. Also over the past few years the black market has benefited those in power opposed to legal sales of oil via regular channels. Not a big incentive to play by the rules. With all the talk that Iran will re-enter the market… it will take a lot longer than is currently expected.

Iraq also dismissed their oil minister. Iraq recently instructed their international drillers to HALT new production due to their inability to pay them the concessions they would owe them. There is no agreement today between Iraq and Kurdistan (northeast section of Iraq that produces about 1/4th of all Iraq oil production). Security issues are increasing in Iraq as some oil sites were bombed last month by ISIS. The increase in supply from Iraq is in serious question. Yet, oil demand is coming.

Natural Gas Production:
The production DECLINE in Natural gas production is now increasing. But the ceiling on natural gas should be around $2.75 for the next 12-18 months. One of our biggest fields, the Marcellus/Utica area in the northeast is essentially locked due to insufficient pipelines to get the gas to market. Without unencumbered access to market the gas produced has lower value. The pipeline infrastructure is not going to increase with new pipes until late 2016 and into 2017. Natural gas is linked to oil as well. With a drag on oil prices and pipeline restrictions the pressure is on to keep natural gas prices low.

Liquified Natural Gas [LNG] Production:
Cheniere Energy Partners (CQP) has shipped a few cargoes since early February. They are now moving LNG to contracted customers selling left overs on the spot market. It’s been a long wait and they are now in the game. As time passes the process to liquefy and load/ship will become more efficient and we should see Cheniere move around 10 loads a month. Later this year their 2nd line comes on-line.

Other Oil/NatGas Producers:
Laredo (LPI), PDC Energy (PDCE), Concho Resources (CXO), Diamondback Energy (FANG), and Parsley Energy (PE) are all responding to the oil recovery from mid $20s to $40 with each selection UP over 30% since mid February. As crude moves higher into demand these picks should continue to move higher. Each has excellent fundamentals with great production growth planned this fiscal year. There may be some profit taking just ahead of this great run, so another window may offer itself up to enter in early May post-earnings and the redermination value of asset bases for the sector.

2016 Strategy

It is working. Growth selections in a slightly bullish/flat market can produce excellent returns.

AAPL: Apple, Inc.
Then the encryption issue is now over with the media and the stock has ran unexpectedly. We shall see a small window of iPhone 5Se sales at the upcoming earnings release. The catalyst this year is launching in India. Their population of 800 million is a vast new market.

SBUX: Starbucks, Inc.
They changed their loyalty program, launching it’s largest retail outlet in NYC, are initiating liquor sales in Canada, branded a new VISA CCard, and are opening an outlet in Italy. SBUX is moving ahead on all fronts.

NKE: Nike, Inc.
The Port of Los Angeles strike impacted some of Nike inventories. That has now passed. Recent earnings indicated an increase in both top and bottom line numbers. Earnings grew by 20% and revenue grew by 7%. These are good results. The catalyst is 3Q-16 ahead of the Summer Olympics.

NFLX: Netflix
The stock price is performing exactly as desired—a slow ascent moving forward. In the next month they will increase their domestic pricing around $1.00. Ahead are other increases totaling around an aggregate increase of $2.00/month. But, having said that Hulu, HBO, and Prime Video are still higher than the $9.99/month so NFLX is still a bargain. The price increase can deliver around $33 Million/month in NEW top line revenue. The stock price should begin to reflect this during 2Q.

SWHC: Smith and Wesson
Guns are STILL selling. Although background checks were down in March by around 6% and that initiated a selloff in SWHC although overall background checks were up over 36% Y/Y. We anticipate the selling of their hunting summer products to increase during 2Q ahead of the summer vacations/hunting.

NXPI: NXP Semiconductor N.V.
This firm makes semiconductors chips. Mobile pay chips. Automotive sensor chips. Wearable chips. These are global trends that NXPI is in the center with substantial market share. The stock is performing as expected with good gains since entry.

NVDA: Nvidia
These four segments of products will propel NVDA forward: Driveless cars, Gaming, Virtual Reality, and Smart TVs. All are explosive and gaining ground. This is a great longer term stock to own.

OLED: Universal Display Corporation
Their technology is a series of organic films between two conducters offering better performance, efficiency, a thinner/flexible form factor, cool to touch, very long life, better color, non-breakable and higher contrast: this is a disruptive technology with patents to protect its ownership. (Catalyst) This year Apple is releasing the iPhone 7 along with a smaller form factor. Apple is also entering India this year for the first time. A smaller iPhone, new, first time entry into India with and OLED screen can sell 50 million units the first year. OLED has already partnered with NEC, Philips and LG Chem in the lighting sector. Global manufacturing capacity is being built to go on-line 1Q17 for large screen TVs.

PANW: Palo Alto Networks (do not own yet)

Some mergers have happened and more will in the next two quarters. The best of breed is PANW as they offer an edge to edge solution covering both the CYBER prevention, both enterprise-based and cloud solutions for enterprises and cloud based infrastructure companies. PANW has the biggest shot at becoming the largest vendor in the cybersecurity space. We identified this firm in January ahead of the February selloff.

GILD: Gilead
Biotechs live by their pipeline of drugs COMING to market. GILDs total clinical 2’s and 3’s are lengthy enough to rank it #2 among its peers. The stock is performing as expected INSPITE of the pressure in this sector.

CELG: Celgene
CELGs total clinical 2’s and 3’s are lengthy enough to rank it #1 among its peers. The stock is performing as expected INSPITE of the pressure in this sector.

CQP: Cheniere Energy Partners
CQP is a master limited partnership under LNG (Cheniere) that actually produces the Liquefied NatGas for export. They shipped 3 cargoes in March and are slated to increase that run rate as efficiencies are built into the loading process.

Demand is increasing globally for LNG and CQP is our pick in this space.

GLNG: Golar Inc.
This company is one of the global transport companies for LNG. They have a large fleet of young ships, and a good orderbook of newbuilds. They also provide a solution for countries without facilities to produce LNG and then will deliver it as well. Each month new purchase orders are emerging for LNG buyers. Golar is best positioned to take advantage.

RYAAY: Ryanair
This is an Ireland-based low cost airline led by CEO Michael O’Leary (Irish enough for you?). They are the down and dirty price player in the European markets. This airline has increased their customer base by 25% in December, no debt, 1B$ cash in hand, P/E is less than 13, fuel is hedged at 95% of usage, pay a 4% dividend, and profit margin is over 24%. They serve 78 European locations, #1 market share, #1 lowest costs, and intend to reduce their fares this year by another 6%. They release earnings on 2 May. As the summer holiday season approaches the travel will increase in Europe.

Good luck and will report again next month.

– Jim Willis


Update from Last Week

By Nell Sloane – Capital Trading Group

The Fed minutes were released last week and there wasn’t much to take other than the usual Fed double speak that we have become accustomed to. What was interesting and its what we here have noted for some time, is that the FED is truly the “Global” central bank. Despite their dual congressional mandates, most should ask the FED the real question, exactly who do they work for? We know it’s a bit naïve to think that the FED can ignore China or global economics in general, considering all the interconnectedness via “globalization.”

However, we would like to hear it from them in an explanation worthy of the general American consumer. We find it hard to believe that the basic American will benefit from keeping interest rates low, so Chinese, European and Japanese banks and all their QE can export deflation. Yea great, so we get cheaper junk, but cheaper is a relative term isn’t it, a $20 million Manhattan apartment is cheap to some. On the other hand cheap cannot be sold to the unemployed, undereducated or overeducated indebted American consumer for that matter. This is where policy is failing, in the upper echelons of 33 Liberty and most notably obvious at the New York economic forum, this was quite obvious, yet does the commoner even matter anymore?

This is Keynesian totalitarian control at its finest, yet flying at the wheel in autopilot, does not provide the majority with pertinent investment information. Rather it provides a sort of conditioning that the world has been accustomed to since the early days of Greenspan and his plunge protection team. Yes Steve Liesman, it was as real back then as it is today, despite all your denial of such. It has simply morphed into the Bernanke “Put” and now the Yellen “Carry” it forward. The world has never seen such “global Central Bank coordination to this scale, but it truly represents an “all in” mantra that most have truly yet to realize.

Considering that this 1st quarter according to BofA just 19% of funds outperformed the SP500. This was the lowest rate since 1998, growth funds weren’t this bad since 1991. So what gives? Why can’t the pros outperform? Well its simple, the investment arena knows of the widespread Central Bank manipulation and continually invests with caution and disbelief. They know the prudent thing is to be mindful of the real catalyst behind asset prices, QE and NIRP. These are new constructs that do not fit well into traditional investment models, a negative interest rate? Come on, we all know fundamentally this makes ZERO sense, yet here we are.

Now considering all those investment funds and their fee structures, this will add to the investor’s woes and continue to strip out fees on top of under-performance, once again, the basic commoner loses in the long run. Isn’t this what all this trouble is about? Protecting the long run? As an investor you are taught to think long term, that it all smooths out in the long run. Yes it is a good old adage, but mindsets and constructs change and in the lightning quick investment world, people better begin to notice the real investors of today, the high speed, quick hitting algorithms that dominate the financial landscape. They aren’t a myth but a new dynamic that needs to be reckoned with. Perhaps this is why the majority funds are losing out. The system that is in place now doesn’t exactly reward the long term anymore, it rewards the quick hitting algorithmic schematics and investment managers better take notice.

Someone else that should take notice is Mr. Kuroda in Japan. There is a reason why the commoners there are purchasing home safes. They know fundamentals and tradition in Japan and negative rates have taken their toll. The investors and the people are going to walk with their Yen and park them in the mattress. There is not much Mr.K can do but watch idly by as the Yen spikes higher and higher and the pressure mounts on these central planners as the capital ratio’s plummet across the land. This type of negative feedback loop will be hard to stop. Sometimes you can’t have your cake and eat it too. Anyway here is a chart of the Yen and it has a long way to go:

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This move shouldn’t come as a surprise, the nice base formed down at 80, coupled with these insane policies means someone is about test the BOJ’s resolve. The upside doesn’t look like there is much resistance.

As for US 30yr yields the real money is voting that volatility and uncertainty is still abound and why not, EU and Japanese yields this far below US, come on this has to offers someone some enticement don’t’ you think? Without further adieu the chart:

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On another note, a correlation set up that we like to watch between the US bond future and the SP500 future has shown notably narrowing in the spread. We use this as an asset allocation guide post and potential asset flow indicator, here is the chart:

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Ok that is it, another week goes by and the continued guessing game will continue until either fundamentals take over or the investment community balks at all these central banks game playing.

– Nell Sloane

Miami Beach Real Estate – Why It’s Important for All Real Estate Investors

April 8th Weekly Recap

Click Here to Download This Full Report
(Article from Jordan Wirsz)


Savant Report Week End Summary

April 8, 2016
By Jordan Wirsz – Savant Investment Partners

STOCKS, BONDS, AND BEARS…OH MY:
Capital is leaving the stock market in big waves. And where the capital is heading, you wouldn’t believe – bonds.

Since January, we’ve seen an inflow of capital from the sidelines (aka under the mattress), but we’ve also seen institutional capital pulling incredible amount of funds out of the stock market and putting it into bonds. This is mostly on speculation that one of several events will drive higher bond prices and lower yields, such as:

  • A recession will drive capital into bonds as a safe haven; or
  • Negative interest rates will inflate the bubble of bonds even further

I’m happy on the short view of the S&P – patiently waiting for the downward break or the slow “spring melt” that technically appear to be taking hold in the stock market.

The equity outflow numbers come after a pretty volatile week in equities. The stock market ended down this week, technical signals are still in negative territory, and we’re well above the 50 day moving average of the closing price on the S&P. CNBC reported on the equity outflows and bond inflows: http://www.cnbc.com/2016/04/07/billions-of-dollars-bail-on-stocks-and-buy-bonds.html

The precursor to most pullbacks in the economy come from the financial sector. This week, global banks underperformed the market by 18%, a new low for the S&P Bank Index Vs. S&P500 relative performance:

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I’m definitely not an advocate for doom and gloom, but the big money that is exiting banking is smelling something that they don’t like. This should tip us all off that something is brewing, if nothing else, the financial regulation that could continue to crush banks after the horrendous Dodd Frank act was passed…The effects of which we’re still learning about. All of this on the backdrop of the Fed trying to figure out when and how much to raise interest rates. As reported earlier, the macro conditions aren’t favorable for higher real interest rates, and the macro capital flows are keeping them pretty low still with bond buying binges in the billions.

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Nearing zero, aren’t we? How this technical chart unfolds will tell us whether there is room for sustained low rates, or if we’re doing to gently fade higher.

Bond inflows and equity outflows tell a lot of stories, especially in banking as noted above. One area that the U.S. has constantly been waiting to bust is the student loan bubble. A new survey shows that about 43% of student loans were either delinquent or had payments postponed. Getting ready to short Sallie Mae?

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The problem with trying to time the student loan bubble is the same challenge trying to time markets…The markets can be wrong longer than you can stay solvent. For years now, people have been calling the student loan market a “bubble.” And I agree, it is. However, that piper will not get his payment until we have a fiscally responsible POTUS or Bernie Sanders gets elected and virtually bankrupts the system and forgives all debts…Both scenarios result in a big bubble pop. Timing would be uncertain. However, anything in between those two extremes (aka Hillary Clinton or Ted Cruz) may delay the inevitable in the student loan market. When you consider that student loan debt is $1.2 TRILLION dollars, that’s enough to make you nervous. Now consider that probably 60% or better of those “graduates” studied nonsense majors and have more holes in their faces than they do years in the workforce…And its all but horrific. Millions of hard working Americans who worked multiple jobs to pay off student loan debt are now carrying the weight of those who have no work ethic, skill sets, or plans to pay off the debt other than going to Bernie Sanders rallies. Not trying to be political, but this $1.2 TRILLION problem is knocking on the door of disaster. Even low interest rates don’t fix the student debt problems.

The part of our economy known as Gen Y or “Mille nails” is about to create another banking crisis. While savings rates among income earning adults is on the rise, student loans, credit cards and auto-debt is on the rise in a big way.

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The “subprime” auto loans are comprised, in part, of millennials with little or not income documentation or job history. The Gen X and older crowd, as you can see, are hell bent on reducing their auto related debt burdens.

Let me ask you a rhetorical question: If you imagined how hard it is for millennials to make their subprime auto loan payments, credit card payments on 5.7% increasing debt balances and student loans (for those that are paying…How hard do you think it would be for them to make those payments if real interest rates rose 150 bps or more? That’s right…About impossible. So, low rates are the flavor of this season in the cycle, no doubt.

Speaking of interest rates, last week, I showed you a survey chart showing what traders thought the probability of a rate hike was in April, which was about 5%. Now take a look at this chart, with about 40% of the survey implying 0 hikes in 2016, and about 40% saying they may be one rate hike, with a small minority projecting 2 or 3 hikes. Low rates are here to stay for a while.

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EMPLOYMENT:
Some good news from the U.S. employment sector…Finally, labor force participation rate looks like it has bottomed…FINALLY.

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Growth in the U.S. Labor force finally exceeded the population growth:

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Here is an incredibly telling survey chart showing people’s views on local job availability:

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WORLD:
Problems around the world persist. Greece, who I really would love to see as a great turn around story, is still fighting catastrophic levels of unemployment:

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China is also getting ready to ravage the commodity world AGAIN with copper export numbers…

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And if China’s problems were big enough, they are starting to see business debt default at staggering rates…

As bad loan balances at China’s banks rise, Beijing is implementing a debt for equity swap at the nation’s lenders. Banks will convert nonperforming loans into shares of the borrowers. Inefficient firms who are unable to pay their debt will thus be allowed to continue rather than going into bankruptcy. Other than shedding debt and changing owners, these businesses are unlikely to be restructured, resulting in moral hazard.

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What continues to baffle me beyond what words I can muster to express my disbelief, is how China’s real estate (housing) market is showing signs of recovery, when it should be continuing to fall:

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I continue to caution all international real estate investors to stay away from real estate in China, Australia, and Canada. Beyond the bounces and continued increases in some areas, common sense has to play a part in realizing that no matter what values do short term, long term risk is a hefty price to pay for what is already an overvalued marketplace. This is referred to as a “bull trap’s return to normalcy.”

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As an investor, I realize that investing has as much to do with psychology as anything else. Psychology is impossible to time. People can remain irrational for a lifetime. So the better bet than taking a short position, is to buy value when and where value is present. There is virtually no fundamental or technical reason for either China real estate or Australia real estate would do anything but sink. So instead of arguing with people paying prices that make no economic sense whatsoever, I choose to stay on the sidelines and wait for the value buy.

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MY BOTTOM LINE:

EQUITIES/STOCKS: This week, I remain in a short view for the equities markets. No, I’m not a perpetual bear… I just call it like I see it.

STUDENT LOANS: The bubble is real, but there really isn’t a viable way to time it, and politics will play a big role in that bet, short or long…

INTEREST RATES & BONDS: It would not surprise me in the least to see a rally in bonds, nor a firm hold for this year in rates or possibly one single raise from Janet Yellen.

CHINA: Still screwed.

RECESSION: Still a possibility for 2016-2017…The bank stocks may be the first indication of trouble brewing from this point forward.

COMMODITIES: Well, you can see copper is in for a long haul on the bearish side of the train. Generally speaking, I don’t see any reason to be bullish anything in commodities.

REAL ESTATE: BUY U.S. REAL ESTATE!!! SELL ALL FOREIGN REAL ESTATE. That’s my view, and I’m sticking to it. You’ll note that I don’t talk too much about real estate in the Savant Reports. There are two reasons for that. (1) That is my primary business, and I don’t want the Savant Report to come across as a “sales pitch” for my investment company. (2) Not much changes in real estate week to week, so there is little news during the week except for interest rates.

More to come next week!

April 1st Weekly Recap

Click Here to Download This Full Report
(Article from Jordan Wirsz)


Savant Report Week End Summary

April 1, 2016
By Jordan Wirsz – Savant Investment Partners

AGRICULTURE
We’re going to start this week’s report off by digging into the global commodity meltdown, continuing with yesterday’s massive down day in the corn market, dipping futures below $3.50 for the first time in months. The big drop came after the U.S. Agriculture Department report showed farmers intend to plant 93.601 million acres of corn this spring, the third most since 1944. That forecast raised the prospect of adding more supplies to an already huge stockpile, sending corn prices into a tailspin and causing growers to question their seeding choices. This blow to an already depressed grain market is no doubt going to keep a lot of farmers up at night.
 
In recent months, I’ve written about the global commodity super cycle ending, and how many farmers are going to feel the stress from low crop prices. This drop came as no surprise to the Savant Report subscribers, knowing that there isn’t yet enough “blood in the water” to call a market bottom. Unfortunately, the blood is definitely going to start running at a faster pace with this break in the price of corn for those growers with any substantial part of their acreage planted with it.

May Corn Chart:
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The technical signs in the corn market aren’t very bullish. On yesterday’s drop, the ADX (market direction strength indicator) rose substantially, telling me that there is definitely both producers selling and short sellers in the market. The long term effects of the selloff have yet to be known but the possibility of hitting $3.00-$3.25 corn is very real. Its not just the price of corn, it is also the cost of storing it, and the high input costs that growers have to invest in the crops to be efficient and productive. The net sale cost of corn is definitely not just the gross sales price in the futures market. All around, this is a scary time for anyone in the agriculture business.
 
What is scarier than the current “tough times” that the farmers are feeling, is the idea that it may be this way for an extended period of time. Weather one bad year is enough, but two, three, or four in a row is literally devastating to their balance sheet and any available liquid capital. Now take into account lower land values and no real equity to leverage into the next year. This could get really, really interesting in a not-so-fun kind of way.

The saga of hard times in the agriculture business continues…

OIL
A picture says a thousand words:

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The chart above published by Bloomberg, but created by Harry Dent & Co. shows a long term technical breakdown in the price of crude. HOWEVER, I think Harry Dent gets a lot of things wrong, and $20, even $10 in the price of oil is one of them.
 
Harry Dent, the national “doom and gloom” headliner always seems to scare people into subscribing to her publications. About the only thing Harry Dent and I agree on, is that Australian real estate prices are poised to collapse. In 2010, Harry Dent said that home prices would not recover. In 2011, he told everyone to “sell all non-essential real estate”. In 2012, he said real estate was a “short”. Since, values have doubled or tripled in some cases. Now he is telling people that the real estate market is going to collapse in 2016…more garbage.
 
I know you’re asking, “why show a chart from Harry Dent if you think his opinion is garbage?” Simple: It’s a contrarian indicator. If prices collapse and Harry Dent says it will never recover. Boom! It’s time to buy.
 
Oil is down this week, now trading today at about $37 and bumping up perfectly against a support line. Technicals are showing that it is oversold, and I’m thinking its as good of a time as any to start picking the right stocks for the long haul of the energy cycle. Like anything, I don’t try to pick the bottom. That is virtually impossible. But it is reasonable to assume that the market has seen the bottom, and unlikely to go lower than the previous lows in the high $20’s. Somewhere between there and here is going to be a great time to buy for the long term. We’re only one or two geopolitical events away from $60 oil.
 
The asset price correlation of oil is concerning a lot of investors across the world. What happens in oil doesn’t necessarily always stay in oil.

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This week I had lunch with an old partner of mine who is now in the energy business, which he understands well. As the CEO of an energy company in Houston, I would hope he does. His comment to me during lunch was that “oil will never be the same.” The fracking revolution was exactly that – a revolution. The energy world changed forever. Even oil rich countries like Saudi Arabia are finding themselves in fiscal challenges over the oil conundrum. As the price of oil declines, so does their bank account.

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An interesting article in the LA Times was published this week, detailing how Saudi Arabia is buying land in California and Arizona for…no, not oil…WATER. Saudi Arabia is running low not only on cash reserves and oil revenues, but also on food. Saudi Arabia is now importing much of their food. The need to grow their food also comes with the need to for water to make it grow. This LA Times article is worth the read: http://www.latimes.com/business/la-fi-saudi-arabia-alfalfa-20160329-story.html
 
So maybe there is a silver lining for farmland owners in the southwestern U.S. with being able to sell the land (and water rights) to Saudi Arabia.
 
Really the net positive to low oil prices is the transportation sector. While airlines benefit from lower fuel costs, so does the average family:

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CHINA
The China saga is what it is. As I predicted years ago and as I have continued to predict, Chinese capital flow is going to run into the U.S. like there is no tomorrow. Take a look at Chinese capital takeover target in U.S. assets growth:

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Although the U.S. has its headwinds, I believe that foreign capital pouring into U.S. assets will keep any recessionary pressures mild.

STOCKS-EQUITIES
Well, I’ve been proven wrong last week and this week. The S&P continues to rise higher, above the trend line. The market “doesn’t care” that stochastics are overbought, and that this rally is long in the tooth.

BUT…I remain bearish in my conviction. And if I’m patient long enough, I’ll be right.
 
Here is a chart of the S&P not caring about my bearish sentiment:

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This is a perfect example of why I make a better investor than I do trader. Timing these things is incredibly difficult. It’s a guessing game, and some people are better at guessing than I am.
 
But the truth of the matter is, we are really overbought, and I believe we’re in need of a real correction badly. There is something happening right now that usually happens before or during recessions:

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This is bad news for stock market bulls. There is an increasing chance that we will see a recession in 2016 or 2017.

If you watched my podcast from yesterday, you’ll note that my forecast for 2016-2017 is still a 30% chance of recession. The chart above all but confirms that we are heading in that direction unless something changes between now and the next few quarters.
 
INTEREST RATES
The Fed knows we are teetering on the edge of a correction, or worse, a recession. Rates have held steady, and investors doubt that a rate change is coming at the next meeting. After this week’s comments, there is a surveyed implied probability of a rate increase of a measly 4.6% in April when the Fed meets again.

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Mark my words…the rate changes coming are going to be small, and gradual. Do not fear or fret over rising interest rates. I think rates have bottomed, and I expect rates to remain low for some time. REMEMBER: Rates and the prices of notes or bonds have an INVERSE relationship.

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Keep in mind, the rest of the world is becoming more and more important to our Fed’s policy going forward. Global economic issues are having a lot of impact on our monetary policy. Not that the U.S. hasn’t been important to the world at large from an economic standpoint, but with so much global financial chaos around us, we need to take into account the fragile state of our own economy and how factors abroad could uncover cracks in our own economy here at home.

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See my podcast yesterday for additional commentary on the rate forecast.
 
CURRENCIES
The U.S. Dollar has retreated off of the 1.00 index basis, to approximately .95:

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It took the Fed a couple of years to realize that US monetary policy can’t be managed in isolation. Global risks and the dollar are becoming increasingly important. While the Fed doesn’t have a formal target with respect to the strength of the US dollar, informally the dollar has become a third mandate (employment, inflation, and to some extent the dollar exchange rate).   

THE BOTTOM LINE

     

  1. Agriculture continues to hurt…don’t be bullish (yet) on the agriculture or commodity space.
  2. The S&P defies me. So be it. I’m still erring on the side of short. Even if the market rallied higher, I’m still of the belief that its overvalued and macroeconomics aren’t supporting current valuations.
  3. Time to dip your toe into energy.
  4. 95% chance that rates will stay steady at the April Fed meeting.

Until next week,

Jordan Wirsz

What to Expect for the Rest of 2016